Price-to-Book (P/B) Ratio by Sector (S&P 500) 1979 – 2018

The table below lists the historical price-to-book (P/B) ratios by sector, calculated using S&P 500 companies. It’s important to remember that the valuations of different sectors can’t be compared directly with each other using price-to-book ratio. To evaluate whether a sector might be undervalued/overvalued, today’s P/B should be compared against the sector’s historical average.

For the lastest data, check the sector valuation datasets provided by Siblis Research.

Purchase S&P 500 Sector/Industry Valuation Researcher Dataset by Siblis Research that provides all key valuation metrics by GICS Sector & Industry, including market caps, earnings, enterprise values, EBITDAs, free cash flows and historical GICS Sector/Industry classifications all current and past S&P 500 companies. The dataset also provides adjusted share prices (total returns) which allows you to examine the performance of the companies before/during/after a company was part of the index. Check a sample file from here.

The graph above shows the P/B ratio of Utilities sector and the 3-year forward return of the sector. For Utilities, there exists a very strong relationship between price-to-book and stock market gains. But the relationship with returns and the ratio is not as clear for all the sectors so the sector specific P/B is far from a perfect valuation indicator.

P/B ratio’s relationship with stock market returns

The column “Corr. with returns” in the table means the correlation of the historical P/B ratio of a sector and the 3-year forward returns (the total rate of return during the period of the next three years) of the sector. For all the sectors, the correlation is negative which means that price-to-book ratio higher than the historical average is associated with lower returns and vice versa.

However, the strength of the relationship varies quite a lot. For Utilities, Consumer Staples and Consumer Discretionary companies, the correlation is close to minus one which indicate a strong relationship, meaning the P/B can be used as an accurate indicator if a sector is undervalued. For Real Estate, Energy and Financial companies the correlation is close to zero which would mean that the relationship is weak and higher than average price-to-book ratio does not always mean that the sector is overvalued.

It is important to remember that the P/B ratio of one sector should not be compared directly to other sectors. It depends on the industry how important the actual assets that a company owns are for generation revenue. For many companies, intellectual capital or brand value is not captured as a part of assets but these can be the most crucial components of the firm’s performance. In order to determine if a sector could be overvalued, its current P/B should be compared to the sector’s historical average.

The weaknesses and limitations of price-book ratio are well discussed. Many investing gurus have declared the ratio close to meaningless but research has shown that shares with low P/B consistently outperforms stocks with high market-to-book value. Also our research shows that the ratio can be successfully used to evaluate valuation levels of sectors.

GICS Sector Classification

The Global Industry Classification Standard was launched in 1999 by MSCI and S&P Global. The classification consists of eleven main sectors, that are divided into industry groups, industries and finally to 157 different sub-industries. Each company can belong to only one sector/industry. The main factor for deciding the classification of a corporation is its revenues: the main source of revenues determines the company’s principal business activity. In addition, a group of qualitatively factors can also be used in the classification process.

The classification is not fixed but there can be changes. In August 2016, Real Estate was added as the eleventh main sector. Before it used to be part of Financials. Altogether, there has been nine changes to the classification system since 1999.

Price-to-Book Ratio

P/B ratio is calculated by dividing a company’s share price by the book value per share. The book value per share is reported on a firm’s balance sheet. The logic behind the ratio is to compare the value of a company’s assets to the price that investors are ready to pay for the company as a whole. A company with high P/B is expected to generate more earnings with lesser amount of assets.